Thursday, August 9, 2012

Thu 9 Aug - FCCN, HMV, PON, TRCS

Good morning! Trading statement from French Connection (FCCN), which is a stock I hold (in moderate size). We already knew from previous trading statements that things were not going at all well in the UK/Europe retail division of FCCN, so a grim H1 (to 31 July) was fully expected. But remember that FCCN is not just a retailer (and has comparatively few, and fairly small, UK stand-alone shops, at just 70).

It's brand licensing and wholesale, and operations in the US and Far East have been trading well. So the profits they make largely mop up the losses from UK/Europe retail (which I reckon could lose as much as £20m this year). My back of the fag packet calculations for the full year are for a loss of around £4-5m. Which is a survivable situation, given that they had around £32m in net cash, plus a large owned debtor book.

These are the key points from today's trading update;

"Trading has continued broadly in-line with guidance provided in the interim management statement on 17 May 2012.  Group revenue for the six months to 31 July 2012 was 7% below the level achieved last year while gross margin was also lower as a result of additional discounting.  The operating result from continuing operations for the half-year will therefore be below last year by approximately £7 million.  Net cash at the end of the period was in the region of £20 million."

Last year's interims were a profit of £0.7m, so we're looking at an H1 loss of around £6.3m this year - bad, but not disastrous in my opinion.

What is more of a concern is that net cash has fallen from £30.9m to £20m, so a third has gone in the last year. So unless they turn this thing around within the next year or two, that cash pile could disappear.

Bear in mind the share price has collapsed to 20p, and the mkt cap is only £19m, so the market is expecting dire performance & has priced it in already.

The big question is whether they can turn it around? There's not much in the rest of the statement to suggest that a turnaround is happening yet. Glimmers of hope are in "the initial reaction has been encouraging" for the new season stock which has recently gone into the shops. But they are "very cautious in our outlook for retail revenue in the second half".

Bad news about the lucrative Sears licensing deal in the USA. That's been cancelled by Sears, which will mean a £1.9m reduction in net income in future years. Oh dear.

A chink of light is that USA wholesale is continuing to do well, offsetting reductions in Europe. And new licensing opportunities (such as kidswear) are being developed.

Overall, not any reason for optimism, but the question is whether it's already in the price or not? I think we're likely to see a further slip in the share price today, realistically.

If they do manage to turn it around, then the shares will multi-bag, and of course there's got to be a high chance of a management buy-out, given the paltry mkt cap, strong balance sheet, and the founder already owning 42%.
However in the meantime, things are not looking good.

Another struggling retailer, HMV Group (HMV) reports its results for the year-ended 30 April 2012. It's pro forma loss is £16.2m (versus a profit of £17.6m). With net debt of £166.7m it's difficult to see this as anything other than a zombie company, with worthless shares - since the Banks are effectively in control.

Somewhat strangely, they state that they expect a profit of £10m (pro forma, i.e. adjusting for disposals) for 2012/13 due to changes in supplier arrangements. HMV does deserve praise for giving its suppliers a chunk of the equity (was it 10% from memory?) in order to incentivise them to give it leeway. Very clever. Maybe if Game Group had done something similar, they might still be in existence?

With this much debt, and a terrible structural outlook due to downloads & streaming, I wouldn't touch HMV shares with a bargepole, and am amazed it's still trading.

Psion (PON) results come out, but are academic as Motorola is buying it for 88p/share.

£32m mkt cap Tracsis (TRCS) has had a good run in the last year, with the shares more than doubling on a series of positive updates. Their pre-close statement today looks solid - confirming its 26 June update that revenue would be over £8.5m and adjusted EBITDA over £3.0m for the year ended 31 July 2012. Their cash position is strong at £7.5m, and debt-free.

The sales pipeline is strong, but they caution that growth in 2012/13 will be at a slower pace than 2011/12, so that might put a dampener on things. My view remains that the share price is up with events after recent rises, and a forecast PER of 22 is probably as high as it's likely to get in the short term.

On a more positive note, the FTSE 100 futures are up 30 points, so should be a pleasant start. Have a great day!


  1. Thanks Paul, these are very useful comments on the morning reports.


  2. Morning Pete,

    Many thanks - always good to hear feedback.
    I'm amazed that FCCN shares have actually gone up this morning on what I thought was a pretty poor Tr Stat - maybe the bad news is fully in the price now?

    Just shows, I can only ever offer an opinion - some will be right, but some will be wrong!

    Cheers, Paul.

  3. Paul, check the advfn thread on Tracsis and you'll find the broker has upgraded eps for this year to 10p, giving it a PE of around 12. Also had cash of at least 25p per share at last results.....

  4. Thanks for that Malcolm, duly noted.

    My other reservation with Tracsis is how sustainable the bumper profits are, because quite a lot of their sales are hardware, which are non-recurring. It's on a high multiple of sales now as well.

    Trouble is, good growth companies always look expensive when they are growing rapidly! But often the shares can multi-bag again despite this, if growth continues. I'm not convinced by Tracsis at this valuation, but good luck with it.

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